Question

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecasted sales figures:

Actual Forecast Additional Information November $620,000 January $700,000 April forecast $550,000 December 640,000 February 740,000 March 560,000

Of the firm’s sales, 30 percent are for cash and the remaining 70 percent are on credit. Of credit sales, 35 percent are paid in the month after sale and 65 percent are paid in the second month after the sale. Materials cost 25 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 50 percent of sales and is paid for in the month of sales. Selling and administrative expense is 15 percent of sales and is also paid in the month of sales. Overhead expense is $22,000 in cash per month.
  
Depreciation expense is $12,100 per month. Taxes of $10,100 will be paid in January, and dividends of $12,500 will be paid in March. Cash at the beginning of January is $122,000, and the minimum desired cash balance is $117,000.

a. Prepare a schedule of monthly cash receipts for January, February, and March.

	Harry’s Carryout Stores Cash Receipts Schedule November December January February March Sales Credit sales Cash sales One month after sale Two months after sale Total cash receipts $0 $0 $0

b. Prepare a schedule of monthly cash payments for January, February, and March.

c. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

  

Answer 1

a.

Harry's Carryout Stores
Cash Receipts Schedule
	November	December	January	February	March
Sales $	620000	640000	700000	740000	560000
Credit sales (70%)	434000	448000	490000	518000	392000
Cash sales (30%)	186000	192000	210000	222000	168000
One month after sale (35%)		151900	156800	171500	181300
Two months after sale (65%)			282100	291200	318500
Total cash receipts $			648900	684700	667800

b.

Harry's Carryout Stores
Cash Payments Schedule
	January	February	March
Material purchases $	175000	185000	140000
Labor expense (50%)	350000	370000	280000
Selling and administrative expense (15%)	105000	111000	84000
Overhead expense	22000	22000	22000
Taxes	10100
Dividends			12500
Total cash payments $	662100	688000	538500

Depreciation being a non-cash expense is not considered in cash payments.

Workings:

Payment for material purchases:
	December	January	February	March	April
Sales $	640000	700000	740000	560000	550000
Materials cost (25%)	160000	175000	185000	140000	137500
Purchases	175000	185000	140000	137500
Payments $		175000	185000	140000

c.

Harry's Carryout Stores
Cash Budget
	January	February	March
Beginning cash balance $	122000	117000	117000
Add receipts:
Collections from customers	648900	684700	667800
Total cash available	770900	801700	784800
Less cash disbursements:
Total cash disbursements	662100	688000	538500
Excess (deficiency) of cash available over disbursements	108800	113700	246300
Financing:
Borrowings	8200	3300
Repayments			-11500
Interest
Total financing	8200	3300	-11500
Ending cash balance $	117000	117000	234800